Steward lost money in its first year, but complied with rules

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Steward Health Care System lost money in its first year, but complied with conditions imposed by the state in 2010 when it recommended Steward be allowed to take over the six Caritas Christi Health Care hospitals, according to a report released Wednesday by the Massachusetts attorney general’s office.

The 70-page report looks at the Boston-based company’s compliance with its commitments — such as whether it retained employees, maintained services, and made capital improvements — as well as its market impact. But it covers only the fiscal year ending Sept. 30, 2011, and the eight hospitals and 1,840 physicians that were part of the health care system that year, making most of its data 16 months old.

In fiscal year 2011, the for-profit system, which is owned by New York private equity firm Cerberus Capital Management, posted a $14.6 million operating loss and a total deficit of $56.9 million that includes one-time expenses related to the hospital purchases, the report said. While outpatient volume increased, expenses outpaced revenues.

Attorney General Martha Coakley, in a letter accompanying the much-anticipated report, said the one-year review “does not provide a reasonable basis to predict or draw conclusions about Steward’s ongoing performance.”

Instead, officials in Coakley’s office said their goal was to compile baseline data about the performance of Steward so they are better able to make comparisons as they continue to monitor the growing hospital and doctors system. Its formation through the acquisition of Caritas was approved by the Supreme Judicial Court on Coakley’s recommendation.

“Our first year of review reinforces previous findings that Steward acquired community hospitals in deteriorating financial condition and with significant deferred capital investment needs,” Coakley wrote in her letter. “Our review of Steward’s impact in its first year of operations indicates it is striving to meet its stated objective.”

Coakley was not available for comment Wednesday.

Health care analysts said that because her report focused on a time period early in Steward’s evolution, it is too soon to conclude how the hospital system will progress. The report noted that Steward already has spent more than $300 million on the hospitals, including the initial investment from Cerberus and money Steward has borrowed.

“This is health care,” said Marc A. Bard, codirector of the Tufts Health Care Institute, an educational and training group in Boston. “You can’t do an overnight turnaround and still keep the operation open for business. The real question is does [Steward’s] plan to reduce losses cut the mustard. As best I can tell, it’s a rational plan. Now they have to execute on it.”

Ellen Lutch Bender, president of Newton consulting firm Bender Strategies, said the success or failure of Steward will have a major impact on health care in Massachusetts.

“Cerberus and Steward have invested a huge amount of money, and so far there’s no return on that investment,” Bender said. “The next few years will tell whether that model is sustainable.”

Coakley’s report is not the first indication that Steward is losing money. A financial report posted last summer by the state Division of Health Care Finance and Policy showed the system lost $38.9 million for the 2011 fiscal year.

But it included hospitals Steward did not own for the entire year, such as Quincy Medical Center and Morton Hospital, and omitted parts of the business such as pharmacies and home health care. Coakley’s report examined the financial health of the overall Steward system.

Chris Murphy, a Steward spokesman, said the company had expected to lose money the first year, partly because of the costs of the acquisition and partly because it was investing hundreds of millions of dollars in capital improvements and information technology in the acquired hospitals.

Without those costs, the system would have had a positive cash flow in fiscal 2011, he said.

“Since the inception of Steward, we’ve had a very detailed seven-year business plan,” Murphy said. “Everything that happened in that one-year time frame in the report was expected.”

“Today we’re where we thought we’d be” in moving the system to profitability, he said.

Murphy also noted Steward provided Coakley with detailed information about insurance contracts, market share, and other financial data that is not required to be made public by the nonprofit hospitals with which it competes in Massachusetts.

“This is an unprecedented level of transparency,” he said. “We would call on the other hospitals to submit to this level of transparency as well if we really want as a state to understand what is driving health care costs.”

The report also discloses that Steward, which operates 11 hospitals in eastern Massachusetts, obtained a five-year revolving credit line of $150 million from a trio of banks in June 2011. The credit line, which allows it to borrow more money, was increased to $200 million last year, with Steward pledging “substantially all its assets as collateral.” Steward was in compliance with the loan terms in fiscal 2011, the report said.

It also said the number of full-time jobs at Steward’s holdings increased about 3 percent to 9,277 that year. Its physician network expanded by 14 percent to more than 1,800 affiliated physicians as Steward stepped up efforts to attract more doctors.

“The competitive implications of this growth are not yet fully apparent,” the report said. But it said the office would continue to monitor “the competitive impact of Steward’s physician recruitment practices, and how Steward’s strategy for growing its physician network interplays with changes in its patient volume and financial performance.”